Many people cite divorce as a leading reason for their bankruptcy filing. However, planning ahead can make both your bankruptcy and your divorce less complicated and more cost effective. Whether you should file a bankruptcy before or after a divorce depends on where you live, how much property and debt you have, and what type of bankruptcy you wish to choose to file.
Bankruptcy and Divorce Costs
Bankruptcy filing fees are the same for joint and individual filings. So filing a joint bankruptcy with your spouse before a divorce can save you a lot on court fees. Also, if you decide to hire a bankruptcy attorney, your attorney fees will likely be much lower for a joint bankruptcy than if each of you filed separately. However, you should let your bankruptcy attorney know about your upcoming divorce as there may be a conflict of interest for him or her to represent you both.
Filing for bankruptcy before a divorce will simplify the issues regarding debt and property division and lower your divorce costs as a result.
Chapter 7 vs. Chapter 13 Bankruptcy
A Chapter 7 is a liquidation bankruptcy designed to get rid of your unsecured debts such as credit card debt and medical bills. In a Chapter 7, you usually receive a discharge after only a few months. So it can be completed quickly before a divorce.
In contrast, a Chapter 13 bankruptcy lasts three to five years because you have to pay back some or all of your debts through a repayment plan. So if you were looking to file a Chapter 13, it may be a better idea to file individually after the divorce because it takes a long time to complete.
Wiping out your debts jointly through a bankruptcy will simplify the property division process in a divorce. However, before filing a joint bankruptcy you must make sure that your state allows you enough exemptions to protect all property you own between you and your spouse. Certain states allow you to double the exemption amounts if you file jointly. So if you own a lot of property, it may be a better idea to file a joint bankruptcy if you can double your exemptions.
If you can’t double your exemptions and you have more property than you can exempt in a joint bankruptcy, it may be more advantageous to file individually after the property has been divided in the divorce. Also, keep in mind that if you file bankruptcy during an ongoing divorce the automatic stay will put a hold on the property division process until the bankruptcy is completed.
Allocation of Debts
Litigating which debts should be assigned to each spouse in a divorce can be a costly and time consuming process. Further, ordering one spouse to pay a certain debt in a divorce decree does not change the other spouse’s obligations toward that creditor.
For example, let’s say your ex-husband was ordered in the divorce to pay a joint credit card you had together. If he doesn’t pay it or files bankruptcy then you are still on the hook for the debt and the creditor can come after you to collect it. If you end up paying the debt, you have a right to be reimbursed by your ex-husband because he violated the divorce decree. This holds true even if he filed bankruptcy because he can discharge his obligation to pay the creditor but he cannot discharge his obligations to you under the divorce decree.
However, trying to collect from your ex will usually mean spending more money to pursue him in court. As a result, it may be in both spouses’ best interest to file bankruptcy and wipe out their combined debts before a divorce.
Income Qualification for Chapter 7
If you intend to file a Chapter 7, the decision to file before or after a divorce can come down to income if you maintain a single household. If you wish to file jointly, you must include your combined income in the bankruptcy. If your joint income is too high, then you may not be able to qualify for a Chapter 7.
This can happen even if each spouse’s income individually is low enough to qualify on his or her own. This is because Chapter 7 income limits are based on household size and the limit for a household of two is not twice that of a single person household (it’s usually only slightly higher). In that case, it may be necessary to wait until each spouse has a separate household after the divorce to file bankruptcy.
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